When tax reform passes, some Californians will move to cheaper states (so they say)

A cap on state and local tax deductions and the mortgage interest deduction (MID) would cause one-third of U.S. homebuyers to try to buy in other states. This percentage is even higher in California, where residents rely heavily on such deductions to make up for the high income taxes and cost of living, according to a survey by Redfin.

In recent weeks, the House of Representatives and the Senate both passed similar versions of a tax overhaul bill, with some key differences. Members of the Senate and the House are meeting in Conference Committee to hash out these differences and form a final bill.

In the initial bills, both the House and Senate included the elimination of state and local income taxes. The House included a provision to limit the amount of mortgage qualifying for the MID from $1.1 million to $500,000.

While nothing has been signed yet, at the time of publication it appears the MID is mostly safe from tax reform. The final version appears to limit the amount of mortgage eligible for the MID to $750,000. It also limits the deductibility of home equity loans (HELOCs) to $100,000.

The state and local income tax deduction — and the property tax deduction — is also further limited. Under the joint version of the bill, these deductions will be capped at $10,000.

Redfin surveyed 900 homebuyers active on Redfin’s home search engine across the nation in November — not a huge sample, but indicative of a trend.

Nationwide, 11% of potential homebuyers said they will seriously consider moving out-of-state if these tax changes pass. 15% said they will consider moving.

In California, a larger 17% said they will seriously consider leaving the state if these tax changes pass. 14% said they will seriously consider moving.

For both California and national respondents, 6% said they will absolutely move to another state if these tax changes occur.

California’s high taxes

Californians pay some of the highest taxes in the nation. The state’s top tax rate is the highest in the nation. Further, California’s higher income levels — canceled out by the high cost of living here — increase the actual amounts paid in taxes.

Currently, roughly 15 million Californians deduct state, local and property tax deductions and 7 million taxpayers claim the MID, according to the California Department of Finance.

The limited ability to deduct these payments will translate to residents paying much more in taxes than they are used to paying. On the other hand, this legislation works to the advantage of states like Texas and Florida, where income and property taxes are low or non-existent.

But will residents actually leave California for low-tax states?

Probably not. The cost of moving alone negates any immediate tax savings to be had. But the higher tax burden for Californians does mean less money in California pockets.

For real estate, this translates to less money free to be spent on housing. The state already has the highest rents relative to income in the nation — renters regularly spend half or more of their paycheck on housing costs. Would-be homebuyers are unable to buy due to the exorbitant cost of homes (read: cost of land) here in California. Combined, this makes for one of the lowest homeownership rates in the nation.

Expect homeownership to continue at its sub-55% rate for years to come. This tax plan does nothing to encourage responsible homeownership or assist qualified renters in saving for a down payment. In fact, as homebuyers find themselves with less cash on hand following tax day, they may be unable to keep up with the steep home price increases that have occurred across the state since 2012.

That’s the bad news. The good news for real estate agents and brokers is that demand for homes runs so deep (due mostly to the lack of new construction relative to homebuyers) that it’s unlikely home prices will be much affected by the tax changes. Home prices will be impacted by rising mortgage interest rates in 2018. This price slippage will be shallow and brief, as homebuyers clamor over California’s small inventory of home listings.

7 Comments

It’s not the wealthy leaving California so much. It’s mainly the middle and working class leaving, and they are leaving in droves. It makes no sense to live in a high tax state, that will now become more taxed thanks to dems wanting more money after federal tax changes. It also makes no sense to live in a state where houses cost ridiculous amounts of money. We are leaving the state soon and most of the working class people we know have already left. The wages to cost of housing ratio in California is absolutely stupid. A person makes less in another state, but once you calculate the cost of living ratio it is far more beneficial to live in other states. Even if you keep all costs, except housing, constant, the housing to wages ratio is reason enough to leave California. For example, a $400,000 house in a non-metro area of California where a RN can expect to make about $40/hour can be had for around $120,000 in a non-metro part of Texas where that RN can expect to make $30 to $36/hour. That represents a 25% (maximum) drop in wages to received an approximately 70% reduction in housing costs. In addition, you likely would receive a nicer house, larger house, larger backyard and more distance between you and your neighbors. Also, in addition to that, you will likely inherit a better school district as most of California is terrible for education now. In fact, moving to another state could possible save a family several thousand a month just in private school tuition fees, as if you choose carefully, you could easily use a public school that matches or exceeds the quality of education of the private school from California. From there you can pile on the saving in fuel (at least 50 cents a gallon savings in gasoline), food (usually much cheaper outside of California), insurance (much cheaper outside California), state income tax, state sales tax and so forth.

Now, compound all of this with the idea that Prop 13 will eventually have to go in California (A state that is pretty much bankrupt and continues to waste money like crazy). Once prop 13 goes, few working class and middle class will be able to afford their property taxes in California as their taxes will jump from something reasonable like $1200 a year to something unmanageable like $6,000 a year.

As it stands, my property taxes for a small (less than 900 sq ft) condo in California are far more than my Arizona house (which is over 1200 sq ft). If Prop 13 were to be removed the condo taxes would swell tremendously.

Now many people think Prop 13 will never be overturned, but, the legislature in California is currently working hard on it and has been for some time. It is coming eventually.

Then you can factor in not so easy to quantify benefits (as well as easily quantifiable ones) of living in other states such as safer neighborhoods, kids able to play outside with other kids, less traffic (thus tons of time saved), no water restrictions, lower utility costs, less illegal aliens (thus safer spaces), less licensing requirements for professional careers and less licensing fees and sometimes longer periods between renewals, cheaper vehicle registration fees, less smog testing requirements, easier to register with doctors and dentists, cheaper medical fees, no earthquakes (thus no need for earthquake insurance and cheaper homeowner’s insurance), better roads in many states (less car repairs, less stress), cheaper car repairs costs, better public transportation systems in many states, no mandatory vaccinations and the list goes on and on….and on.

My wife is a nurse (RN), and a lot of nurses are leaving California (especially after some of the ridiculous medical laws that have been passed in California). I am an engineer and there are much better places to live than California where the jobs offer better training (something impossible to find in California) with much better benefits and better job security.

California has become the perfect storm of reasons to leave unless you are super wealthy and already own a ton of real estate and do not need to work or if you are a Chinese national looking to buy property so that you can gain an immigration visa (buying your immigration) or if you are an illegal alien in need of free medical, education and housing.

Once again, this author ( if you want to call her that) turns political. The left in past would call this a ” loophole” for the wealthy, but because the new tax laws were approved by most all repubs, it now becomes a flawed tax policy. Reducing the write offs for the wealthiest of homeowners now becomes “less” money in the wealthy homeowner’s pockets resulting in an exodus of a certain percentage of the California population. I call B.S… you can’t have it both ways… Hipocracy at it’s finest just displayed. First Tuesday needs to make continuing and higher education great again. More choices for continuing education without political bias would be nice. This blue collar guy will need to leave this state without ever taking advantage of a million dollar write off…

Our tax problems are home grown right here in California – with the tax and spend California legislators we’ve elected. The problem is not that someone living on a farm in Iowa or in a condo in Phoenix is no longer going to subsidize Jerry Brown’s spending choices. We must vote smarter if this state is to remain viable.

Maybe the CA State government will reduce our State Tax and Property Tax rates to make up for the loss of the deductions at the Federal level. Using the same logic as the Trump Administration, the lower taxes will encourage spending and growth. Ya right, I don’t believe it.

High California taxes have been pushing families and businesses out of California for many years. This is nothing new. California will continue to increase taxes in order to make up for the lost revenue, which will make the problem worse. Smart.

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